5/28/2009 @ 12:55PM

Sprint Bull Cashes In Big Win

Sprint Nextel
: At the start of April we saw a large and bullish option trade on Sprint when its shares were trading at just a shade beneath $4 apiece. The bull at the time seemed content to consign the $1.35 lowest traded price of the year to the history books, preferring to focus on what the new Palm Pre smart phone might do for business. The position played out pretty well indeed for the investor and Thursday appears to be the day when he can crack open his piggy bank with a smile. The investor appears to be closing down a 20,000 lot August expiration call spread involving the 4.0 and 6.0 strike prices.

At its inception the trade cost a net 57 cent premium. Thursday the trade sold for 93 cents and so a 63% gain. In addition the trader also defrayed a larger portion of this premium by writing a similar amount of puts at the 3.0 strike for 50 cents each. Thursday he bought back just 3,000 of these for just 10 cents. Sadly for the investor he missed out on a superior return just one week ago when the share price traded six cents shy of the upper strike price as CEO, Dan Hesse announced that the company is keeping pretty quiet about the June 6 launch of the Pre, because it expects to be in short supply faced with strong demand. Shares have subsequently recoiled by a fair amount, and they are currently off by 3.3% Thursday at $4.90.

Moody’s Corp
: The investor who poured scorn on
Lehman Brothers
just months before the investment bank entered the record books as the world’s largest bankruptcy, has found a new victim and is shorting Moody’s Corp. Judging by its 6.8% share price decline and a put-to-call ratio of 5.2 this morning David Einhorn appears to have started a new trend. The investor runs New York-based Greenlight Capital Inc., a hedge fund managing assets of $5.1 billion. At a conference last night in the city, Mr. Einhorn denounced the business model of ratings agencies, undermining demand for their services as government-mandated. Ill-ratings of asset-backed debt by ratings agencies served to fuel the recent credit crisis.

Much of Thursday’s option activity appears to be fresh positioning judging by the fact that relatively few outstanding positions exist at Thursday’s active strikes. The June 26 strike puts were traded on volume of 4,100 contracts compared to established open interest of 709 lots, while the July 25 strike puts were traded almost 1,400 times dwarfing existing positions of 183 lots. The picture was the same at the August 21.0 strike where premiums rose by 69%. Volume at the January 2010 25 strike puts was a neat 1,200 lots before lunch. Implied options volatility as you might expect rose 20% overnight to 60% to reflect increased uncertainty by option players.

Homebuilders Select Sector SPDR
:Shares of the homebuilders exchange-traded fund have declined more than 4% to $11.53 this morning as the housing sector continues to get slammed with falling home prices and rising inventory. Investors are possibly suffering a delayed reaction to the latest slide in bond prices, which has forced yields higher. That’s bad news for anyone wanting to get a mortgage and last week’s 19% slump in refinancing activity confirms the sensitivity to rising price. But that hasn’t stopped one option trader in hoping for a significant rebound this coming fall as he appears to have established a bull call spread in the September contract.

The transaction involved the purchase of 25,000 calls at the September 15 strike price for a premium of 40 cents apiece spread against the sale of 25,000 calls at the higher September 17 strike for 10 cents each. The net cost of the bullish position amounts to 30 cents and yields a maximum potential profit of $1.70 if shares of the ETF can rally up to $17 by expiration. Shares of the fund would need to climb more than 32% and breach the breakeven point at $15.30 before this housing-bull can amass profits on the trade. The XHB has approximately four months to make a McMansion out of a Mobile home.

Exelixis
:The biotechnology company’s shares surged upward by more than 27.5% to $5.76 after it entered into an exclusive global alliance for novel targeted oncology therapies with
Sanofi-Aventis
. The license agreement gives SNY an exclusive worldwide license to certain inhibitors (XL147, XL765) that are currently in phase 1 clinical trials as well as provides for exclusive collaboration with EXEL for the discovery of PI3K (phosphoinositide-3) inhibitors. The ultimate goal of discovering PI3K inhibitors stems from the theory that the activation of the PI3K pathway is common in human tumors. The pathway has been indicated in promoting cell proliferation and survival in addition to resistance to chemotherapy and radiotherapy.

Combining the research efforts of the two firms will hopefully accelerate the discovery of PI3K inhibitors which, per the license agreement, grants Sanofi-Aventis sole responsibility for subsequent clinical, regulatory, manufacturing and commercial activities. Exelixis will receive an upfront cash payment as well as future payments that could potentially amass to $1 billion according to the SNY press release. Exelixis will also receive royalties when and if products are commercialized.

The collaboration agreement spurred option investors to exchange more than 15,200 contracts this morning out of the total existing open interest on the stock of 34,785 lots. A chunk of 10,000 calls appear to have been sold at the January 2010 7.5 strike price for a premium of 65 cents apiece. It is likely that the transaction is a covered call initiated by an investor who bought shares of the underlying stock and is looking to secure gains on EXEL by establishing an exit strategy. If this is the case, the trader has effectively reduced the cost of the shares to approximately $4.88 (assuming a purchase price of $5.53) by writing the call options. The trader will enjoy gains of more than 53% if the stock rallies through $7.50 and the underlying shares are called away from him at expiration.

Market Vectors Gold Miners ETF
:The fund tracking the shares of gold mining companies is higher by more than 5% to $43.38 attracting bullish option investors seeking the pot of gold at the end of the rainbow. One individual hoping for continued upward movement in shares was observed shedding puts in exchange for out-of-the-money calls. At the July 35 strike price 5,500 puts were sold for a premium of 52 cents apiece and were spread against the purchase of 5,500 calls at the July 48 strike for $1.07 each. The net cost of getting long the calls amounts to 55 cents and yields a breakeven point at $48.55.

The ETF must rise approximately 12% from the current price in order for this golden-boy to begin to garner profits to the upside. GDX was trading higher than $49 back on July 15, 2008, and has since failed to recover to that level, despite the fact that the inflation/deflation debate is hotter than ever increasing the appeal of gold as a hedge. Further evidence of bullish sentiment was seen in the form of some 2,000 calls picked up at the near-term June 44 strike price for a premium of $1.20 each. Traders long of the contracts are hoping for shares to increase 4% through the breakeven point at $45.20 by expiration next month.

Hartford Financial Services
Group, Inc.:The insurance and financial services company attracted a frenzy of near-term put buyers who appear to be bracing for continued bearish movement in the stock in addition to the ex-dividend deduction of one nickel subtracted from Thursday’s price. HIG shares are currently off by less than 1% to $14.62. The June 14 strike price was targeted by one investor who purchased 25,000 puts for an average premium of $1.16 each.

The transaction yields a breakeven point at $12.84 and suggests that the trader is expecting to profit–or protect a long stock position–from a more than 12% decline in the stock by expiration. We note additional bearishness at the now in-the-money June 15 strike price where more than 2,700 puts were coveted for $1.79 each as well as some 2,600 deeper in-the-money puts scooped up at the June 16 strike for 2.44 per contract. All signs, at least those on Main St. in Options Land, point downtown for HIG.